{"id":62465,"date":"2023-09-18T10:30:09","date_gmt":"2023-09-18T14:30:09","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/street-earnings-overstated-for-70-of-sp-500-in-2q23\/"},"modified":"2023-09-18T10:30:13","modified_gmt":"2023-09-18T14:30:13","slug":"street-earnings-overstated-for-70-of-sp-500-in-2q23","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=62465","title":{"rendered":"Street Earnings Overstated For 70% Of S&#038;P 500 In 2Q23"},"content":{"rendered":"<div>\n<p>Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. My Core Earnings show Street Earnings fail to account for a material amount of unusual income and charges, which distorts investors\u2019 view of profitability across the S&amp;P 500. This report shows:<\/p>\n<ul>\n<li>the prevalence and magnitude of overstated Street Earnings in the S&amp;P 500,<\/li>\n<li>why Street Earnings (and GAAP earnings) are flawed and not adjusted as promised, and<\/li>\n<li>five S&amp;P 500 companies with overstated Street Earnings and an unattractive Stock Rating.<\/li>\n<\/ul>\n<h3 class=\"subhead3-embed color-body bg-base font-accent font-size text-align\"><strong>208 S&amp;P 500 Companies Overstate EPS by More than 10%<\/strong><\/h3>\n<p>For 357 companies in the S&amp;P 500, or 71%, Street Earnings are higher than Core Earnings for the trailing-twelve-months (TTM) ended 2Q23. In the TTM ended 1Q23, 347 companies overstated their earnings. My Core Earnings research is based on the latest audited financial data, which is the calendar 2Q23 10-Q in most cases. Price data as of 8\/15\/23.<\/p>\n<p>When Street Earnings are higher than Core Earnings, they are overstated by an average of 24%, per Figure 1.<\/p>\n<p><strong>Figure 1: Street Earnings Overstated by 24% on Average in TTM Through 2Q23<\/strong><\/p>\n<p><fbs-ad position=\"inread\" progressive=\"\" ad-id=\"article-0-inread\" aria-hidden=\"true\" role=\"presentation\"><\/fbs-ad><\/p>\n<p>Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.<\/p>\n<p>The 357 companies with overstated Street Earnings make up 70% of the market cap of the S&amp;P 500 as of 8\/15\/23, which is down from 73% in 1Q23, measured with TTM data in each quarter.<\/p>\n<p><strong>Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 8\/15\/23<\/strong><\/p>\n<p>For over a third of the S&amp;P 500 (208 companies), Street Earnings are overstated by more than 10% vs. Core Earnings. These 208 companies make up 30% of the market cap of the S&amp;P 500 as of 8\/15\/23. See Figure 3.<\/p>\n<p><strong>Figure 3: Overstated Street Earnings by &gt; 10% as % of Market Cap: 2012 through 8\/15\/23<\/strong><\/p>\n<h3 class=\"subhead3-embed color-body bg-base font-accent font-size text-align\"><strong>The Five Worst Offenders in the S&amp;P 500<\/strong><\/h3>\n<p>Figure 4 shows five S&amp;P 500 stocks with an unattractive-or-worse Stock Rating and the most overstated Street Earnings (Street Distortion as a % of Street Earnings per share) over the TTM through 2Q23. \u201cStreet Distortion\u201d equals the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings miss the true profitability, or lack thereof, of these businesses.<\/p>\n<p><strong>Figure 4: S&amp;P 500 Companies with Most Overstated Street Earnings: TTM 2Q23<\/strong><\/p>\n<p>*Measured as Street Distortion as a percent of Street EPS.<\/p>\n<p>In the section below, I detail the hidden and reported unusual items that distort GAAP Earnings for MGM Resorts International. All of these unusual income and charges are removed from Core Earnings.<\/p>\n<h3 class=\"subhead3-embed color-body bg-base font-accent font-size text-align\"><strong>MGM Resorts\u2019 2Q23 TTM Street Earnings Overstated by $1.68\/share<\/strong><\/h3>\n<p>The difference between, or Street Distortion in, MGM Resorts\u2019 Street Earnings ($0.33\/share) and Core Earnings (-$1.35\/share) is $1.68\/share, or 509% percent of Street Earnings.<\/p>\n<p>MGM Resorts\u2019 GAAP Earnings Distortion is higher at $2.31\/share, which indicates that Street Earnings are identifying some non-operating and unusual items. However, given the disconnect between Street and Core Earnings, it\u2019s clear that Street Earnings still miss material unusual items.<\/p>\n<p><strong>Figure 5: Comparing MGM Resorts\u2019 GAAP, Street, and Core Earnings: TTM 2Q23<\/strong><\/p>\n<p>Below, I detail the differences between Core Earnings and GAAP Earnings so readers can audit my research. I would be happy to reconcile my Core Earnings with Street Earnings but cannot because I do not have the details on how analysts calculate Street Earnings.<\/p>\n<p>MGM Resorts\u2019 Earnings Distortion Score is Strong Miss and its Stock Rating is Unattractive. MGM Resorts receives an Unattractive rating largely due to its negative economic earnings, negative return on invested capital (ROIC) of -1%, and the expensive valuation of its stock. Despite trading at $42\/share, MGM has an economic book value (EBV), or no-growth value, of -$2\/share.<\/p>\n<p>Figure 6 details the differences between MGM Resorts\u2019 Core Earnings and GAAP Earnings.<\/p>\n<p><strong>Figure 6: MGM Resorts\u2019 GAAP Earnings to Core Earnings Reconciliation: TTM 2Q23<\/strong><\/p>\n<p>More details:<\/p>\n<p>Total Earnings Distortion of $2.31\/share, which equals $882.5 million, is comprised of the following:<\/p>\n<p>Hidden Unusual Gains, Net = -$0.07\/share, which equals -$25 million and is comprised of:<\/p>\n<ul>\n<li>reversal of $25 million gain previously reported in quarterly filings but no longer broken out in the annual 2022 10-K<\/li>\n<\/ul>\n<p>Reported Unusual Gains Pre-Tax, Net = $4.24\/per share, which equals $1.6 billion and is comprised of:<\/p>\n<p>$1.5 billion in gains on property transactions in the TTM based on<\/p>\n<p>$162 million in \u201cother income in the TTM based on<\/p>\n<p>-$35 million in property transaction expense in the TTM based on<\/p>\n<p>Tax Distortion = -$1.79\/per share, which equals -$685 million<\/p>\n<p>Reported Unusual Gains After-Tax, Net = -$0.08\/per share, which equals -$32 million and is comprised of:<\/p>\n<ul>\n<li>-$32 million in adjustments related to redeemable noncontrolling interests in the 2022 10-K<\/li>\n<\/ul>\n<p>Given that the Earnings Distortion listed above is all reported, unknowing investors may assume Street Earnings properly adjust for these items. However, given the $1.68\/share Street Distortion in MGM Resorts\u2019 earnings, it\u2019s clear that Core Earnings include a more comprehensive set of unusual items when calculating true profitability.<\/p>\n<p><em>Disclosure: David Trainer, Kyle Guske II, Italo Mendon\u00e7a, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.<\/em><\/p>\n<\/div>\n<p>Read the full article <a href=\"https:\/\/www.forbes.com\/sites\/greatspeculations\/2023\/09\/18\/street-earnings-overstated-for-70-of-sp-500-in-2q23\/\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. My Core Earnings show Street Earnings fail to account for a material amount of unusual income and charges, which distorts investors\u2019 view of profitability across the S&amp;P 500. This report shows: the prevalence and magnitude of overstated [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":62466,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-62465","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Street Earnings Overstated For 70% Of S&amp;P 500 In 2Q23 | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. 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